Korea needs to engineer the local currency’s ascent against the U.S. dollar rather than raise interest rates to contain inflation more effectively, experts said Monday.
The government, however, remains opposed to the idea, saying the currency issue should be approached in a broader context as it could have far-reaching ramifications over the overall economy.
The argument comes as Korea’s inflation level is rising faster than expected despite the government’s all-out efforts to keep it under control. The country’s consumer prices jumped 4.5 percent on-year in February, the steepest hike in 27 months.
The central bank recently raised the key interest rate by a quarter percentage point to 3 percent in an effort to curb growing inflationary pressure. This marked the fourth rate hike since July of last year from a record low of 2 percent.
“A rate hike (with bad timing) could result in ballooning the overall household burden (by increasing debt) and possibly trigger such a debacle of household loans as in 2003,” Lee Hun-jai, a former finance minister, said at a seminar last week.
“This poses a dilemma, making it difficult to choose between a rake hike or a rate freeze ... I would rather opt for exchange rates (to stabilize prices),” he added.
Lee admitted that lower exchange rates could undercut exports as they decrease the overseas price competitiveness of Korean goods. But he expressed his confidence that local companies are strong enough to withstand such a challenge as they have secured sufficient profits under a prolonged period of high exchange rates and record-low borrowing costs.
Lee Yong-sup, a lawmaker of the main opposition Democratic Party, echoed the view in a recent report, lashing out at the government’s apparent pursuit of keeping the exchange rate intentionally high to boost exports.
The lawmaker admitted that such a policy helped large conglomerates generate profits, but said it had a negative impact on the business of small and mid-sized companies and consumers by increasing the overall import prices. He argued that the government needs to put the currency exchange rate back to a normal level.
A government report supports the argument that adjusting exchange rates would have much more impact on inflationary pressure than other policy measures.
According to the report unveiled late last year, a 10 percent hike in exchange rates translates to a 0.8 percentage point rise in consumer prices, which is much higher than the impact of the same increases of oil and key raw material prices.
The government has been ramping up efforts to stabilize prices amid fast mounting inflationary pressure caused by oil and commodity prices.
February’s inflation rate surpassed the upper ceiling of the Bank of Korea’s 2-4 percent inflation target band for the second straight month. Experts worry that the prices could jump over 5 percent in the months to come.
The government remains opposed to the idea of adjusting exchange rates as a major tool to ease inflationary pressure.
“Just as interest rates, currency exchange rates can have a far-reaching impact on the overall economy. We cannot run our currency-related policy by focusing only on the inflation problem,” an official of the finance ministry said on condition of anonymity.)
But a different voice is also being heard from the government as some are concerned that situations could get worse rather that better in the months to come.
“If consumer price growth jumps to the upper-4 percent or to the 5 percent level in March, it would be inevitable for the government to pursue all possible measures including (adjustment of) exchange rates, interest rates and other fiscal policies,” another finance ministry official said on condition of anonymity.